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FF Trader Tax Thread

Hello Jim I was on another thread and was just wondering is there any truth to this statement

an LLc has its own bookkeeping, so - you can play fx as an institution. If income is from outside US (offshore company)- you (as an LLC) pay ONLY state tax ~~150 usd a year. It doesnt matter if you are a US citizen or not.

The second matter is your personal tax. For example as an American you pay income tax.

But income of an LLC IS NOT your income... Got it?

You could be a trader in FX LLC in Delaware, you can have a nice "job" - company car or jet, or whatever, your company can pay you rent, etc, etc... and a small salary - taxed by IRS...

And Delaware law allows not to reveal true owners of a company.

I dont know how its today - maybe last years changed sth. But such entities exist not only in DL, also in Nevada and (probably) Virginia.

I'm not a lawyer so everyone should seek pro guidance. There is a lot of firms helping in registration of such entities in the whole world, but in my opinion for commercal activity DL state law is one of the best.

It sounds like the writer is saying if you have an offshore fx broker that sends money to delaware or vegas bank you only have to pay state tax not fed.
Quoting fixme1too
Hello Jim I was on another thread and was just wondering is there any truth to this statement

an LLc has its own bookkeeping, so - you can play fx as an institution. If income is from outside US (offshore company)- you (as an LLC) pay ONLY state tax ~~150 usd a year. It doesnt matter if you are a US citizen or not.

The second matter is your personal tax. For example as an American you pay income tax.

But income of an LLC IS NOT your income... Got it?

You could be a trader in FX LLC in Delaware, you can have a nice "job" - company car or jet, or whatever, your company can pay you rent, etc, etc... and a small salary - taxed by IRS...

And Delaware law allows not to reveal true owners of a company.

I dont know how its today - maybe last years changed sth. But such entities exist not only in DL, also in Nevada and (probably) Virginia.

I'm not a lawyer so everyone should seek pro guidance. There is a lot of firms helping in registration of such entities in the whole world, but in my opinion for commercal activity DL state law is one of the best.

It sounds like the writer is saying if you have an offshore fx broker that sends money to delaware or vegas bank you only have to pay state tax not fed.

Jim Crimmins: The tax code is such that if you use it correctly you can save a lot of money. When anyone starts talking about offshore, and other "gimmics" an old addage that my trading mentor made to me comes to mind. "Jim if people would quit trying to find the holy grail, quit trying to come up with ways to beat the IRS, and instead use that energy to become a better trader, and their fair share of US tax they would be many dollars ahead at the end of the year." I certainly do not know whether your post above falls into this category, but at Traders Accounting we do not deal in off shore, nor do we deal in entities that are set up to beat the IRS out of their fair share. I have enough to worry about my trading rather than worry about the next envelope I open from the IRS.
Hi Jim,


And Welcome to Forex factory, its great to be able to have a tax expert on board. I am a uk resident where there is no tax on betting, but an income of any sort is taxable, so i understand. My broker is FXCM and my account is in the U.S.

Can you define what the difference is legally between spread betting on forex to currency trading through a broker who takes a spread as earnings.
and the tax position
What is the process of being declared a trader by the IRS? Does being declared one means you have to operate as a business entity (LLC, C Corp, S Corp, etc.) or does one have the choice to trade either as an individual or business entity? If there is a choice, what is the difference in the tax rate of the two?
Quoting southernmind
What is the process of being declared a trader by the IRS? Does being declared one means you have to operate as a business entity (LLC, C Corp, S Corp, etc.) or does one have the choice to trade either as an individual or business entity? If there is a choice, what is the difference in the tax rate of the two?
Thanks for the question. You have to maintain certain levels of trading to be considered a Trader in Securities by the IRS. These criteria are found in IRS pub 550, right at the end, generally around page 70. It can be downloaded by going to www.irs.gov and finding it and printing it out. Unfortunately it is my belief that if you trade as a Trader without using an entity as your business, you are dealing with the devil, this is because all we know about traders status comes from court cases, and as we found in out in 2004 in the Chen vs. Commissioner case, a lot of us qualified through the first 10 months of the year, but did not after this decision.
Thanks Jim and Merlin and everyone involved in starting this thread. It is and will be of great service. But on this visit I was wondering why there is not more participation.
Maybe a lot of the newbies do not have enough info to even start thinking about forming a company and paying taxes. They might not know that there are benifits even if they are loosing money.
So here is a link to what I think is a great place to start, if you want to know if you should form an LLC. (Limited Liability Company) for those who might not know. www.corporate.com/entity-comparison.jsp
I'm really trying to get the big picture, and taxes are just a part of it. I'm not just seeing the forest for the trees as far as trading, I'm starting to get an aerial view. However, the way the exponential curve works, I don't think I'll see a tax impact for at least a year or two.

Now that I'm a multi-thousandaire, it's cool to know that someone is willing to offer their expertise. My only question is, when do I really need to start worrying about this? Is it the second I make taxable income on my trading, or is it when my trading income exceeds that of my day job? Or is it when I quit my day job?
"The time to act is when others show signs of tire." --W.D. Gann
Quoting dukeofdents
I'm really trying to get the big picture, and taxes are just a part of it. I'm not just seeing the forest for the trees as far as trading, I'm starting to get an aerial view. However, the way the exponential curve works, I don't think I'll see a tax impact for at least a year or two.

Now that I'm a multi-thousandaire, it's cool to know that someone is willing to offer their expertise. My only question is, when do I really need to start worrying about this? Is it the second I make taxable income on my trading, or is it when my trading income exceeds that of my day job? Or is it when I quit my day job?
One should consider taxes as soon as you begin trading partially because all your trading expenses can be deductable to reduce your personal tax liability, whether you generate profits or losses. There can be some great tax advantages to being a trader including being taxed at a lower rate, being able to take home office deductions, etc., and it is very inexpensive to set up a company like an LLC. Why wait until you are making big money to reduce your personal tax liability? Wouldn't you like to reduce your taxes now?

Jim
Quoting bookfixer
One should consider taxes as soon as you begin trading partially because all your trading expenses can be deductable to reduce your personal tax liability, whether you generate profits or losses. There can be some great tax advantages to being a trader including being taxed at a lower rate, being able to take home office deductions, etc., and it is very inexpensive to set up a company like an LLC. Why wait until you are making big money to reduce your personal tax liability? Wouldn't you like to reduce your taxes now?

Jim
What are the minimum number of people are required to set up an LLC/C-Corp and what are the position titles?
Quoting dukeofdents
I'm really trying to get the big picture, and taxes are just a part of it. I'm not just seeing the forest for the trees as far as trading, I'm starting to get an aerial view. However, the way the exponential curve works, I don't think I'll see a tax impact for at least a year or two.

Now that I'm a multi-thousandaire, it's cool to know that someone is willing to offer their expertise. My only question is, when do I really need to start worrying about this? Is it the second I make taxable income on my trading, or is it when my trading income exceeds that of my day job? Or is it when I quit my day job?
The time to begin to think about trading as a business is when your trading expenses, (and there are a lot of them you pay everyday thinking they are your personal expenses) get to the point that if you can deduct them you will save 1K or more in taxes. Remember that if you can save it you can use it the next year to trade with, so Tax Efficient Trading is all about increasing CASH FLOW for your trading. As a business you can deduct all of these expenses, as an individual you cannot deduct very many of them. Traders Accounting offers a free evaluation of whether you should form a business. You can download the confidential questionnaire at http://www.tradersaccounting.com/taxplan.asp and they will send you a free 40 page report. The first chapter is dedicated to you, using the information in the questionnaire a recommendation will be made for you to decide on. Whether or not you should trade as a business and if so, what type of business. There is a lot of other free information on Traders Accounting's web site.
Well, I've considered doing this under an LLC, as, I'm sure, many others have. The level of capital I am trading makes it more of a hassle to do that then to simply pay taxes, however. I'm beyond the hobby level and somewhere into the part-time job level. I really need some sort of realistic justification for creating a business entity to trade under, hire an accountant, and act like I'm a multi-millionaire when I can afford the taxes on what I do.

Don't get me wrong. It is entirely sensible, and I can do most of it on my own, but the hassle of creating an LLC, closing my personal trading accounts and opening new ones under an LLC with its own bank accounts, etc., is a lot of time and effort for a guy with a few thousand dollars. Not to mention the paperwork and record-keeping. Maybe when I make a few hundred thousand it will be more attractive.
"The time to act is when others show signs of tire." --W.D. Gann
Thanks again for the email. There is a point where it makes more sense to trade as a business. I would recommend that you go to our website and order a free Tax Action Plan. This is a free 40-page report about the various strategies surrounding Traders Taxation. To order it you need to fill out a confidential 3-page questionnaire. When we snail mail the report to you the first chapter is our recommendations of how you can trade in a more tax efficient manner, and the remainder is the tax strategies explained in detail. To order this report go to http://www.tradersaccounting.com/taxplan.aspHope this helps. Jim Crimmins
Quoting southernmind
What are the minimum number of people are required to set up an LLC/C-Corp and what are the position titles?
While you can set up a single person LLC in many states, I prefer to have at least two since IRS disregards a single person LLC for tax purposes.

Just my 2¢

Jim
Quoting dukeofdents
Well, I've considered doing this under an LLC, as, I'm sure, many others have. The level of capital I am trading makes it more of a hassle to do that then to simply pay taxes, however. I'm beyond the hobby level and somewhere into the part-time job level. I really need some sort of realistic justification for creating a business entity to trade under, hire an accountant, and act like I'm a multi-millionaire when I can afford the taxes on what I do.

Don't get me wrong. It is entirely sensible, and I can do most of it on my own, but the hassle of creating an LLC, closing my personal trading accounts and opening new ones under an LLC with its own bank accounts, etc., is a lot of time and effort for a guy with a few thousand dollars. Not to mention the paperwork and record-keeping. Maybe when I make a few hundred thousand it will be more attractive.
Just by switching to an LLC, for a few hundred dollars, you may be able to claim several thousands more in deductions, wouldn't that alone justify the change? I also am a small trader but using an LLC has provided me with an additional $6K - $8K in deductions per year. Home office, ISP and phone expenses, computers, monitors, printers, workshops, subscriptions, mileage, etc. It adds up fast!

Jim
As tax is very important, can you please recommend or do you know any accountant/accounting firm in CANADA that can help canadian traders.
Quoting bookfixer
While you can set up a single person LLC in many states, I prefer to have at least two since IRS disregards a single person LLC for tax purposes.

Just my 2¢

Jim
Traders Accounting completely agrees with Jim above, you do not want a single member LLC as it is disregarded by the IRS, which throws you back into having to either file as a trader or investor.
Quoting bookfixer
Just by switching to an LLC, for a few hundred dollars, you may be able to claim several thousands more in deductions, wouldn't that alone justify the change? I also am a small trader but using an LLC has provided me with an additional $6K - $8K in deductions per year. Home office, ISP and phone expenses, computers, monitors, printers, workshops, subscriptions, mileage, etc. It adds up fast!

Jim
The name of the game in trading is CASH FLOW. For every dollar of trading expense that you can deduct you will increase that cash flow by the same percentage as you are right now paying to a combination of the IRS and State government. You can do the math, does it make sense to you. If you only have a couple of thousand dollars to trade with, then it probably does not because you need to keep that $$ in your trading account it makes no sense to degregate it to pay for setting up an LLC, or corporation. However if you have $12-$15K in a trading account, then do the math, and see if it makes sense. You must remember though to have a professional set up your entity, the IRS is increasing their audit of all small business and personal returns (for an article on this please go to our website www.tradersaccounting.com and sign up for our free newsletter. We will have the statistics coming out in a newsletter next week.) so because of this audit risk you must have your LLC or Corporation set up and managed properly.
Quoting juxta14
As tax is very important, can you please recommend or do you know any accountant/accounting firm in CANADA that can help canadian traders.
Juxta14, thanks for the email. I am sorry we have never made a connection with a Registered Accountant in Canada.
Dear Tax Trader,
Just a quick question, i've been all over the net and searched these forums and can't seem to find out how Forex gains are taxed. I live in Canada and was wondering if Forex was taxed as capital gains or income? i could not find it anywhere in the capital gains section of the canadian tax code.

on a second note, i also noticed that there seems to be alot of trading
through companies, especially offshore. could someone please explain
the advantages in layman terms? dont you have to pay tax anyway if u
want to bring your money back into the country? i know this is probably
too expensive of an option for me (only 10000 trading account, but i would like to understand it anyway.)

any clarification would be greatly appreciate. thanks.

NasdaqNinja
I'm glad this thread was started and look forward to the advice. It will definetely help out us smaller traders on the verge of growing accounts and thinking about converting to a LLC etc.

For right now I'm interested in getting information for claiming taxes, if you have say a mini account, and withdrew a few thousand within the year, as an individual trader.
Thanks.
'Have a good time all the time'
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